COMPANY NEWS

Creating jobs: Infrastructure is the answer

We take fresh water, roads and bridges, hospitals and schools for granted, but it is only through continual expenditure on infrastructure that society can prosper and grow.

Delivering quality infrastructure is complex and expensive, especially in a vast country like Australia.

The Federal Government says it is committed to building infrastructure to support economic growth, create jobs and link businesses to markets and its ongoing $50 billion infrastructure commitment is aimed at improving road and rail linkages in every state. In May it released its 2015 Budget that largely builds on the announcements in the 2014 Budget.

According to Adrian Hart, Senior Manager – Infrastructure and Mining at BIS Shrapnel, despite declines over the past few years, Australia is spending more on non-resources civil infrastructure (transport and utilities) than we used to.

“From research BIS Shrapnel has undertaken for our Engineering Construction in Australia report, we can say that in the 1990s and early 2000s we were spending around $20 billion per annum nationally (in today’s dollars) on non-resources civil infrastructure. Now that figure is closer to $40 billion per annum.

“Broadly speaking, there has been significant over-investment in some utility spaces – such as electricity and urban water security projects (like desalination plants) – but there is a lot more investment we need to make in our transport networks (both freight and passenger), regional utilities and telecommunications.”

Hart says that importantly, given that most of the infrastructure dollars are received as income by domestic suppliers of labour, services (such as equipment hire) as well as construction materials – all of whom then tend to spend this money themselves – BIS Shrapnel estimates that for every dollar spent on infrastructure, another three to four dollars are generated in the economy by these multiplier effects. “Interestingly, we believe the multipliers associated with non-resources civil construction (and particularly transport) are greater than those from the mining investment boom, given that so much of the materials, steel fabrication and even labour for major resources projects had to be imported to meet the sudden surge in demand.”

According to Hart the downturn in resources investment is the biggest driver of the sharp decline in engineering construction work now and over the next three years – and a key reason why economic growth in Australia will be constrained below 3 per cent.

“We expect resources-related engineering construction to fall from around $77 billion in 2013/14 to just $30 billion by 2017/18 – with the completion of major oil and gas projects dominating the outlook.”

But he says that despite the debacle of the East West Link project in Victoria, Australia is considered a high quality destination for overseas capital so the governments have relatively high credit ratings and can borrow at very low cost.

“However, competition for direct private capital investment is intense and, broadly speaking, there are high risk premiums around large greenfield projects. That is where ‘capital recycling’ schemes (where governments finance infrastructure construction and then sell the asset once its revenue-generation capability is proven) can be a useful strategy. New South Wales is leading this approach and consequently has the strongest infrastructure project pipeline in the country.”

“The problem for governments is that the tax revenues we need to sustain funding for building and maintaining infrastructure are themselves not sustainable. Solving our infrastructure funding capability for the long term will inevitably involve wide ranging reform of our tax system,” he concludes.

He says that during the resources boom corners were cut and some businesses failed to manage their businesses as effectively as they could.

“In this new era where most expenditure will be in the non-resources sectors, businesses that are structures and disciplined will find growth markets for their products and services but they will have to work hard and fight for them. There are no free lunches in the civil, construction or in any market for that matter, but there are good opportunities for great companies.”